New Credit is the new account opening activity and any recent ‘hard’ credit inquiries from lenders on your credit report. Approximately 10% of a FICO® Score is based on this information.
How Do New Credit Accounts Affect Your Score?
When you apply for new credit, the lender will usually initiate a credit check. That means they’ll pull your credit report from a credit bureau and use it to calculate your credit score.
Each credit check adds a hard inquiry to your credit report. They’ll be visible to future lenders for two years before aging off, though FICO only considers inquiries from the previous twelve months for credit scoring purposes.
One or two hard inquiries on your credit report might cost you a few points, but your score should bounce back quickly. Any more than that is a warning sign to lenders and could affect your credit score more significantly.
Once you receive approval from a lender, new credit accounts continue to affect your score in other ways.
First, they can impact your Credit Mix, which is worth 10% of your FICO Score. It accounts for the lender preference for borrowers who have demonstrated responsibility with both installment and revolving debt.
Installment debt, like a student loan or car loan, begins by giving the borrower a lump sum of cash. They then make a recurring monthly payment over the life of the loan to cover the principal and interest.
Revolving debt, like a credit card or line of credit, gives borrowers a renewable credit line they can draw on, pay back, and reuse. If your new credit account diversifies your mix among the two types, it can benefit your credit score.
New credit accounts also affect your Length of Credit History, which makes up 15% of your FICO Score. The higher the age of your accounts, the better. That goes for your oldest and newest, as well as your overall average.
Taking on credit lowers your average and resets the age of your newest account, which can cost you points (unless it’s your first credit account).
Finally, and most importantly, new credit accounts affect your Amounts Owed, which are worth 30% of your FICO Score. Generally, new installment accounts cost you points, while new revolving ones can go either way, depending on how you use them.
That’s because installment debt inherently increases your total amounts owed, and more debt means less room for other debt.
You also lose points when installment loans have a high percentage of their original balance remaining, which they all do when they’re new.
New revolving accounts don’t have these issues. They can actually benefit the amounts owed aspect of your score if they lower your credit utilization ratio, which is your amounts owed divided by your credit limit.
For example, if you take out a new credit card and make no purchases, it will increase your limit without increasing your amounts owed, which will lower your credit utilization and add points to your score.
Of course, if you take out a new credit card and immediately max it out, it will raise your credit utilization and cost you points.
FICO’s research shows that opening several credit accounts in a short period of time represents greater risk—especially for people who do not have a long credit history. In this category a FICO® Score takes into account:
- How many new accounts have been opened.
- How long it has been since a new account was opened.
- How many recent requests for credit have been made, as indicated by inquiries to the consumer reporting agencies.
- Length of time since inquiries from credit applications were made by lenders.
- Whether there is a good recent credit history, following any past payment problems.
Looking for an auto, mortgage or student loan may cause multiple lenders to request your credit report, even though you are only looking for one loan. In general, FICO® Scores compensate for this shopping behavior in the following ways:
- FICO® Scores ignore auto, mortgage, and student loan inquiries made in the 30 days prior to scoring. So, consumers who apply for a loan within 30 days, the inquiries won’t affect the score while rate shopping.
- After 30 days, FICO® Scores typically count inquiries of the same type (i.e., auto, mortgage or student loan) that fall within a typical shopping period as just one inquiry when determining your score.
When Should You Apply for New Credit?
If you don’t have any credit accounts yet, you should generally apply for new credit as soon as possible to start building your credit history (assuming you’ve reached financial stability).
If you already have one or more credit accounts, when you should apply for new credit depends primarily on when you last did so and what kind of account you want.
Remember, you should try to avoid accumulating too many hard inquiries on your credit report. You probably shouldn’t apply for another credit account in March if you already did so three times in January.
A good rule of thumb is to wait six months between applications so that your inquiries have time to age off your credit report. That said, depending on what credit account you want, it might make sense to submit multiple applications at once.
If you’re looking for an installment loan, lenders will generally treat all your applications as one if you do them in a short enough window.
Lenders expect people to go through some amount of rate shopping when looking for a mortgage or personal loan to keep their interest charges as low as possible.
The allowable window depends on the scoring method and can range anywhere from 14 days to 45 days. To be safe, try to keep your applications within a 14-day window.
Note that if you apply to separate types of accounts within the same window, such as a car loan and a personal loan, these will count as separate inquiries.
Unfortunately, none of that applies to revolving credit accounts. While you usually shop around for multiple loans and only end up taking one to fund your planned purchase, credit cards are typically more for regular everyday purchases.
Lenders won’t see your application for a second credit card at another credit card company as reasonable because there’s no need for you to limit yourself to just one. Shopping for the best interest rate, cheapest fee, or highest cash rewards is smart, but the credit system dings you for every credit card hard inquiry.
If you’re going to apply for a new credit card account, you’ll have to do so sparingly to avoid damage to your credit. Try to stick to the one application per six months rule, at most.
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